The coronavirus pandemic, while sending the global world in a recession, did not create similar market conditions as the last crisis did. During the 2008-2009 Great Financial Crisis, the volatility on the FX market, the world’s largest market, reached higher levels.
After the initial shock that saw many economies entering lockdown, the response of all central banks in developed economies was to ease monetary policy as quickly as possible. As a result of that, the exchange rates that reflect the value of one currency against another have failed to react in a similar manner as they did in 2008. The initial USD long trade, the classic rush to safety trade, was quickly replaced with a wave of selling the world’s reserve currency.
Significant FX Moves Recently
Now that a few months have passed after the initial pandemic shock, significant FX moves appear on the horizon. To the two extremes, the EURCHF cross and the USDIDR (USD vs. Indian Rupee) had moves bigger than two standard deviations on a table comparing multiple cross-assets.
Perhaps the biggest surprise here is the EURCHF cross. For long viewed as the “troublemaker” for the Swiss National Bank (SNB), it was responsible for a bit of industry shock when in January 2015, the SNB dropped the 1.20 fixed exchange rate floor. Since then, it rarely had overnight returns in excess of two standard deviations, being constantly sold on every bounce. Not this June!
Turning to the Dollar pairs, the global USD liquidity continues to improve – the Eurodollar/T-bill spread is below the pre-pandemic baseline. Moreover, the worlds’ central banks are in a race of balance sheet expansion, with the Fed outpacing its peers both in size and speed of its reactions.
As a consequence, the start of June brought high volatility levels on cross pairs that did not fluctuate so much during this crisis. Some JPY pairs (EURJPY, GBPJPY, USDJPY) and, again, the EURCHF, outperformed.
A comparison of emerging markets cross pairs, and G10 crosses reveals that one emerging market cross witnessed positive adjusted volatility returns on a 200-day standard deviation at the start of June.
Moving forward, the focus shifts to the world’s reserve currency. Already on retreat after the Fed opened up the swap lines, it declined dramatically across the board, especially against developed markets currencies (e.g., AUD, NZD, GBP, EUR).
Will the trend continue throughout June?